Great Investors Don’t Forecast

By |2020-10-20T09:00:50-04:00October 16th, 2020|Blog, Great Investors Series|

“If you mix your politics with your investment decisions, you are making a big mistake.”

– Warren Buffet

In last month’s article, we discussed how dark clouds always contain silver linings. This month, we examine the lessons of 2020 so far.

4 Lessons Learned In The Pandemic

The coronavirus is still very much with us, as is much of the economic dislocation caused by the resulting lockdowns. Although we are evidently closing in rapidly on a vaccine—indeed, a number of vaccines—it may be some time before we have access to it. Frustration is likely to abound as the pandemic continues. Moreover, in the coming weeks, we will have to go through a hyper-partisan presidential election with a variety of voting issues we’ve never had to deal with before.

Let’s take a moment to review what we as investors should have learned—or relearned—since the onset of the stock market panic that began in March and ended when the S&P 500 Index regained its pre-crisis highs in mid-August.

  1. No amount of study—of economic commentary and market forecasting—ever prepares us for the really dramatic market movements, which always seem to come at us out of deep left field. The really significant changes in equity markets almost always come as a result of some dramatic and unpredictable event, which nobody expected and no amount of analysis could have prepared us for. And these events almost always have the effect of rattling our emotions.
  2. As a result, trying to make investment strategy out of “expert” prognostication—much less financial journalism—always sets investors up to fail. Making market predictions based on unpredictable current events is an exercise in futility. Instead, having a long-term plan, and working that plan through all the fears (and fads), tends to keep us on the straight and narrow, and helps us to avoid sudden, emotional decisions.
  3. The equity market fell by 34 percent in 33 days. None of us have ever seen that rapid of a decline before. But with respect to its depth, it was just about average. In fact, the S&P Index has declined by about a third on an average of every five years or so since the end of WWII. In those 75 years, the S&P Index has also gone from about 15 to roughly 3,475 at the time we are writing this. The lesson is that, at least historically, market declines haven’t lasted, and long-term progress has always reasserted itself.
  4. Almost as suddenly as the market crashed, it completely recovered, surmounting its February 19 all-time high on August Note that the news concerning the virus and the economy continued to be dreadful, even as the market came all the way back. There are actually two great lessons here. First, the speed and trajectory of a major market recovery very often mirrors the violence and depth of the preceding decline. And second, the equity market most often resumes its advance, and may even go into new, higher ground, considerably before the economic picture clears. If we wait to invest before we see unambiguously favorable economic trends (or until an election is over), history tells us that we may have missed a very significant part of the market advance.

The overarching lesson of this year’s swift decline and rapid recovery is, of course, that the market can’t be timed, and that the long-term, goal-foc